Does it make sense to have a life insurance policy for your child?
One of my “go to” guys in the world of insurance is Brian Shumak – a highly respected insurance professional in the GTA with two solid decades of experience under his belt.
I asked Brian if he would like to contribute some insights to the blog from time to time, and here is his first submission. Good practical advice – I am looking forward to hearing more from Brian.
“My experience would suggest that most individuals in the financial world chase the ‘Big Fish’ rather than working with the majority of other fish in the sea.
As a result, most of the concepts employed by financial salespeople are really not appropriate for the average Canadian. First make sure you have addressed practical everyday matters.
Today, I will speak about the need or lack thereof for insurance on a child.
When I started out in the financial world two decades ago, I was trained that the sale of life insurance on a child was an easy sale and you only had to play on the emotion of the parent to complete the sale. It did not take long for me to realize several fallacies of life insurance on a child.
First, insurance is not the best place to start saving for anything let alone education and second, putting a lump of insurance on a child without addressing the parents’ needs first was a serious blunder for the well-being of the family.
The typical sales process involves a product peddler taking a set monthly amount, usually tied to a child tax benefit amount, and using the whole amount to set up a permanent insurance contract. The sizzle to the transaction is that the money which grows inside of the policy does so without incurring any tax on the growth, and in the event the child dies prematurely, the parent can properly grieve the loss without taking a loan out to finance the funeral – phooey.
For one thing, a good portion of the premium is used to pay for the insurance costs so the remaining amount, regardless of tax treatment, will grow to a lower amount when compared to almost any other savings vehicle.
With the recent addition of the Canadian Education Savings Grant (CESG), the difference is magnified as life insurance does not qualify for the 20% grant the government awards on the first $2,500 per year of education savings.
Yet, just a few weeks ago I had someone inquire about the benefits of saving using insurance, as a friend of hers had been raving about what she had done for her child.
Second, I have met more than one set of parents who have lost a child. The one thing they all have in common is that no amount of money would have changed one iota of the grieving process.
All that the insurance policy would do is to pay for the funeral costs and then be used to establish a fund of some sort in the child’s name. The insurance proceeds have never been used to allow a parent to even take a paid holiday.
Third, if parents have a limited budget with which to address their own insurance requirements, taking any money away from that to put toward a child is inane.
Taking $30 per month and insuring a parent will go a lot farther to assist your family in the event a parent dies. Moreover, if you are looking to save for a child’s education, do so with an RESP or another explicit savings vehicle, not insurance.
Does this mean insurance on a child should never be implemented? – absolutely not. But before it is, make sure the parent(s)’ needs are met properly, and that there is a savings plan in place for education.
If that is the case, and you are going to take out insurance on a child, make sure to include the ability for that child to get more coverage later in life, regardless of health or vocation.”
Want to learn more, just drop me a note at firstname.lastname@example.org